Tuesday, June 18, 2013

In Hinojos v. Kohl's Corp., ___ F.3d ___ (9th Cir. May 25, 2013), the plaintiff's UCL and CLRA action challenged Kohl's practice of claiming that its prices are discounted off a "regular" or "original" price. The district court dismissed the claim, finding that the plaintiff had not alleged that he had "lost money or property" sufficient for Prop. 64 standing. Slip op. at 4-6.

The Ninth Circuit disagreed, and reversed.

The opinion observed, first of all, that California law explicitly prohibits advertising former prices "unless the alleged former price was the prevailing market price ... within three months next immediately preceding the publication of the advertisement." Slip op. at 7 (quoting Bus. & Prof. Code § 17501). The complaint alleged that Kohl's advertising violated this requirement. See id. at 5.

Hinojos has done everything Kwikset requires to allege an economic injury under the UCL and FAL. He alleges that the advertised discounts conveyed false information about the goods he purchased, i.e., that the goods he purchased sold at a substantially higher price at Kohl’s in the recent past and/or in the prevailing market. He also alleges that he would not have purchased the goods in question absent this misrepresentation. This is sufficient under Kwikset.

Slip op. at 10.

The opinion takes pains to debunk the defendant's argument (and the district court's holding) that Kwikset applies "only in cases involving 'factual misrepresentations about the composition, effects, origin, and substance of advertised products.'" Id. at 11. According to the defendant, "when a merchant misrepresents the 'regular' price of his wares, it does not misrepresent the innate value of those wares so the misled consumer has suffered no economic injury; he gets the product he expected at the price he expected." Id.

The Ninth Circuit found this line of argument unsupported by Kwikset:

Kwikset cannot be so easily limited. It is true that Kwikset itself involved misrepresentations regarding how the merchandise in question was produced; the defendant in Kwikset was a manufacturer of locksets, which it falsely labeled as having been “Made in [the] U.S.A.” It is also true that Kwikset described a number of other examples of misrepresentations concerning a product’s origin or composition that would be actionable under the UCL and FAL: meat falsely labeled as kosher or halal, wine labeled with the wrong region or year, blood diamonds mislabeled as conflict-free, and goods falsely suggesting they were produced by union labor. Kwikset, 216 P.3d at 889–90. Nothing in Kwikset, however, suggests that these examples were intended to be exhaustive instead of illustrative. ....

The district court’s “composition, effects, origin, and substance” test ignores the fact that, to other consumers, a product’s “regular” or “original” price matters; it provides important information about the product’s worth and the prestige that ownership of that product conveys. See Dhruv Grewal & Larry D. Compeau, Comparative Price Advertising: Informative or Deceptive?, 11 J. of Pub. Pol’y & Mktg. 52, 55 (Spring 1992) (“By creating an impression of savings, the presence of a higher reference price enhances subjects’ perceived value and willingness to buy the product.”); id. at 56 (“[E]mpirical studies indicate that as discount size increases, consumers’ perceptions of value and their willingness to buy the product increase, while their intention to search for a lower price decreases.”). Misinformation about a product’s “normal” price is, therefore, significant to many consumers in the same way as a false product label would be. See Kwikset, 246 P.3d at 890 (recognizing that falsely labeling a watch as a Rolex would be an actionable misrepresentation even if the watch was a “functional[] equivalent” of a Rolex). That, of course, is why retailers like Kohl’s have an incentive to advertise false “sales.” It is also why the California legislature has prohibited them from doing so. In fact, the deceived bargain hunter suffers a more obvious economic injury as a result of false advertising than the Kwikset consumer who was duped into buying foreign-made goods, because the bargain hunter’s expectations about the product he just purchased is precisely that it has a higher perceived value and therefore has a higher resale value.